Crystal Ball Design Build ABC’s John Doherty: 2011 more of the same for commercial construction
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By John Doherty, President & CEO
Western Michigan Chapter
Associated Builders and Contractors, Inc.
This past year again presented most West Michigan commercial, industrial and institutional contractors with extraordinary challenges. Those surviving the period of 2008 through 2010 should be “lean, mean, fighting machines,” as it could take 12 to 18 months to see any sustained recovery for West Michigan’s commercial contractors and material suppliers.
Acquired backlogs during previous years continued to be worked down again in 2010. The number of opportunities to replace completed projects with new projects or contracts fell off sharply. Competition for available work was brutal and prices reflected the reality of many contractors chasing fewer and fewer projects. This decline was symbolized by the gradual reduction in the number of “Tower Cranes” visible on Michigan Street and the Medical Mile.
Today, there are no “Tower Cranes” in that area. Major projects like the DeVos Place Convention Center, River House Condos, Towers 25 & 35, Van Andel Research Institute, MSU/Secchia Medical School and Spectrum Health’s Lemmen-Holten Cancer Center and their nearly completed Helen DeVos Children’s Hospital are reminders of the recent “mega boom” in downtown Grand Rapids construction amounting to over $1 billion in construction projects.
The successful passage of West Michigan public school bond issues and college and university construction projects helped keep the industry from sinking deeper into the recession. The area’s inventory of available, bargain priced commercial and retail space created some remodeling and renovation opportunities, but also served to dampen much growth in the construction of new buildings.
(Source: Society of Industrial and Office Realtors, SIOR, www.siormichigan.com/Market_Information.html)
(as reported by McGraw Hill Construction data – recorded contracts for future nonresidential construction projects YTD thru October 2010)
*Amounts can vary significantly month to month due to large projects being recorded. “YTD” offers a more accurate picture of the trend. It would be useful to compare 2010 figures to average annual recorded contracts in 2009 and 2008 to see how much volume has been lost to the “Great Recession.”
(Source: ENR 11/22/10 from U.S. Dept. of Commerce data)
Layoffs continued in 2010 for many construction-related individuals, and most companies are currently reporting 40- to 60-percent declines in their workforces compared to 2008. Since 2000, 83,000 Michigan construction jobs have been lost. Roughly 27 percent of the nation’s construction workforce has been sidelined since 2007 and awaits the promised recovery from the stimulus bills and other measures passed by Congress. Extension of unemployment benefits has helped to soften the ravages of prolonged unemployment, but is no substitute for a “call back” to work.
Some areas of the country are recovering more rapidly than Michigan and are seeking employees. But the pool of available workers is deep and applicants must be willing to travel to opportunities wherever they exist.
Individual contractors have seen national or regional banks reduce their risk by lowering their tolerance for lines of credit or calling in lines of credit. This often forces contractors and material suppliers to seek new banking and credit relationships despite no previous history of problems. Bonding capacities have been lowered by the insurance industry to lessen their exposure to contractor bankruptcies that may result in the bonding company paying to finish the contracts. Discussions between bankers, bond underwriters and construction company owners are often unpleasant.
There are some areas or markets in West Michigan that offer promise for continued growth and may serve as the launch pad for economic recovery in Michigan.
Most observers would never have imagined that manufacturing would lead Michigan out of a decade of industrial and economic decline. Nevertheless, our state is experiencing a sustainable renaissance in manufacturing largely due to efforts to maximize the use of Michigan-based talent and technology to produce high quality products or services at globally competitive prices.
West Michigan’s outreach to global markets and the existence of foreign manufacturers expanding in Michigan offers commercial and industrial contractors a relatively new market to monitor and compete for available work. The following are some of these high potential growth markets:
While there is a battle between forces (or events) that might pull the economy back into further decline and those that would say we are seeing hopeful signs of sustained recovery, much of the drama will be played out on the stage in Lansing. Michigan must make the right moves and often difficult decisions to offer hope for families, businesses and students. Delaying, finger-pointing and denial are no longer acceptable political strategies.
Nationally, Robert Murray, ENR/McGraw Hill’s VP of Economic Affairs, foresees an 8-percent increase in total construction starts in 2011. However, he overestimated the recovery in 2010 when he predicted an 11-percent increase, only to now forecast more like a 6-percent increase. It only shows how difficult this recovery is to predict!
I do not feel that 2011 will offer much “hope and opportunity” for contractors to begin the recovery we all want and desperately need. Overall, I believe the market will be much like it has been in 2010. Survival skills will be tested and the better-managed businesses will be rewarded.
Unemployment will continue to rise and fall depending on the seasons and bidding activity. With the exception of some fortunate contractors who have contracts going into 2011 or ones that will successfully bid on major projects in the first half of 2011, I don’t foresee a major change in employment of local, laid off construction workers. I would see some growth in average hours worked in 2011 by those employed.
ABC’s Chief Economist, Anirban Basu, writes recently that overall U.S. total construction spending in 2010 is down 9.3 percent from a year ago, and 33.7 percent below the peak hit in March 2006. This creates a huge, unutilized capacity issue and will be reflected in bids and construction prices for well into 2012.
The buyer’s market continues. For current and potential clients with cash reserves considering capital investment and expansion, West Michigan’s commercial construction industry offers great ROI potential as they consider updating their facilities; reducing energy costs and installing technologies to create competitive advantages for the next decade.